Holmarc Opto-Mechatronics (NSE:HOLMARC) has had a rough month with its share price down 20%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Holmarc Opto-Mechatronics’ ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Holmarc Opto-Mechatronics
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Holmarc Opto-Mechatronics is:
17% = ₹36m ÷ ₹215m (Based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.17 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Holmarc Opto-Mechatronics’ Earnings Growth And 17% ROE
At first glance, Holmarc Opto-Mechatronics seems to have a decent ROE. On comparing with the average industry ROE of 11% the company’s ROE looks pretty remarkable. This certainly adds some context to Holmarc Opto-Mechatronics’ exceptional 42% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Holmarc Opto-Mechatronics’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 24%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Holmarc Opto-Mechatronics is trading on a high P/E or a low P/E, relative to its industry.
Is Holmarc Opto-Mechatronics Efficiently Re-investing Its Profits?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. This is likely what’s driving the high earnings growth number discussed above.
Conclusion
Overall, we are quite pleased with Holmarc Opto-Mechatronics’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 4 risks we have identified for Holmarc Opto-Mechatronics.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
